> Note that, while a VAT is imposed at every stage of the process, the net effect is to apply the rate one time to the final sales price. The tax is collected in increments (on the “value added” at each stage), but unlike with a pyramiding sales tax, it does not double tax inputs. The VAT and ideal sales tax share an identical tax base and, if imposed at the same rates, yield identical collections.
The VAT is important in Europe, because if a product is manufactured in many countries, each of those countries gets a share of the tax revenue.
No, only the end consumer pays VAT in the country of consumption. Everything else nets out, because as a supplier you either you claim back the amount of VAT you've been charged from your local tax authority or you are subject to a "reverse charge" where the cross-border supplies are effectively treated as domestic for tax purposes.
Everybody pays VAT. As a business you charge VAT for everything you sell and pay that out to the tax authority, and you get VAT back for anything you buy. As a consumer it's just an item on the bill.
Say the VAT rate is 20%. Now if you buy something for $100, install it and charge $100 to your customer, you get back $20 from the tax authority and pay them $20, so if billing cycles align no money actually flows to or from the tax authority. But if you add value, say by buying $100 in parts, assemble them and sell the assembly for $150, you get back $20 for parts purchased but collect $30 for the sale, creating a net flow of $10 to the tax authority.
If everything happens under the same tax authority this nuance doesn't matter, in total there's always a $30 tax on a $150 part, no matter how complex the supply chain. But if more countries are involved the difference matters: if a company in Poland makes parts worth $100 and a company in Germany assembles them and sells them in the German market for $150, that's $20 in taxes for Poland and $10 for Germany. With a sales tax that's only collected when selling to a consumer it would have been $30 for Germany and $0 for Poland.
this is correct. the main advantage of a VAT is incentive alignment. every intermediary producer must collect and remit VAT if they want to claim their VAT refunds for inputs. i.e., a seller of a good in Europe must collect VAT if they want to claim a VAT refund on whatever they paid for the good.
compare to American sales taxes, where sellers have no economic incentive to collect sales taxes beyond the probability of being caught and fined.
If i offer a service for 100 €. I have play VAT for i, typically i add these to the bill, but for the sake of simple numbers i dont.
As an example, i have following costs for offering the service:
- Materials: 20€ - i can deduct these from the VAT.
- Salaries: 60€ - i can NOT deduct these from the VAT.
- Profit: 20€ - i can NOT deduct these from the VAT.
So earning my company 100€ will have me pay (in switzerland for example 7%) approximately 6€ VAT, the 1€ i did not have to pay, must be paid by the producer of the materials. Of course you can argue that the customer pays the 6€ and my company only pays the 1€, but it's never the less always a split bill.
This is such a common misconception that even business owners get wrong. No, it doesn't even out for the business, because they sell their products with a profit and thus pay more in VAT than they get back. You only get more back if you're selling for cheaper than it costs you to make it, meaning you're out of business pretty quick.
Edit: Congratulations to the people who are down voting very basic mathematics.
And therein lies the rub. Any goods / materials from outside the VAT zone will have VAT charged on the import. Vis—a-vis a tariff.
Example
I manufacture and sell teak wood tables in Portugal.
I buy the wood from Asia, which does not have a VAT and is outside the EU. When I import said wood, I get assessed a value to pay VAT on. This is a tariff.
I buy the stain and finish from Germany, which is inside the EU and has a VAT, through a complex paperwork system, I also pay VAT when the finish gets imported to me, but eventually I can claim that VAT paid back and it “nets out”. So I get this back. How do I get it back? I can subtract VAT paid from the VAT collected when I sell the goods.
VAT on b2b sales even within an European country are usually not that important.
You add VAT to things you sell (e.g. car repair services), you pay VAT on things you buy (e.g. car parts). If you collected more VAT on sales than you paid on purchases, you owe that to the tax department.
It's a bit of book-keeping but doesn't affect your profits directly.
They do, it's just that many choose the reverse charge mechanism, so the recipient of the services or goods is responsible for paying the VAT to his tax authority. It makes things easier, it doesn't remove VAT.
I’ve heard it’s also liked among economists because it’s like.. “sound”, somehow, or “efficient” as far as taxes go? Like a lot of special taxes, tariffs, deductions have super complex side effects, kickbacks, unexpected payees and loopholes.. but as I understand VAT is relatively “sane” on paper?
But also there was something about taxing consumption that was bad somehow.. is it regressive? I don’t remember. Feels “flat”, but maybe not?
Neutral is the word. It means that the tax does not change what's the rational actions vs if the tax was not there.
And yes, it's regressive relative to income. Poor people spend all their money on essentials, paying the vat on all their income. Rich people can save most of their money (e.g in stocks), and end up paying a much smaller percentage of their income in VAT.
it is regressive, it impacts small earners more than rich people, since a larger share of their income goes into direct consumption.
But many countries have different VAT brackets for different goods, e.g. in Italy at different times (I'm not sure of the current brackets) "staple" goods like bread or milk had 4% VAT, health and education had 5%, fish or meat had 10%, generic services have 22% and at some point "luxury" goods had 30%+ vat.
Yes, on paper VAT works out better, and it's a darling of economists. In practice, VAT requires more paperwork, accounting, and interaction with the bureaucracy. The end result is that even though the U.S. has the tax pyramiding "problem", you find much more tax avoidance in Europe than in the U.S. Grey and black markets constitute a huge, double-digit fraction of the European economy, and it's what helps sustain organized crime there, even in stereotypically rule-abiding Germany. Like many things in Europe, VAT works well for large enterprises; it's quite burdensome for small businesses, and that's probably where the complaints are coming from--small and medium-sized businesses in the U.S. who find dealing with EU taxation daunting.
In school (economics, law) I had learned all about how great the VAT system is. But about 10 years ago I wanted to buy a simple ~$100 rack shelf to fit a PC Engines APU from an Italian manufacturer. I had to create an Italian tax ID, which was annoying. I recently had to use it again just to buy some tins of anchovies from Italy.[1] In both cases I received more paperwork regarding the VAT than I did the import paperwork. It seems slight but it's actually quite a lot of friction compared to just giving X dollars and receiving your product. Dealing with tax and import crap is exactly why import/export companies exist, creating needless intermediaries that siphon value.
In that light, the "inefficient" sales tax premiums we pay in the US can be interpreted as the cost of enjoying a more decentralized taxation system that makes compliance more convenient and transactions run smoother. There's less accounting and--more importantly (because US accounting can be complex, too)--less coordination required. It's the economics version of worse is better.
[1] And just to be clear, in both cases I was purchasing through a clearly retail-oriented store website. IOW, even as an effectively retail consumer you had to provide a tax ID--the equivalent of an employer ID or social security number in the US. I don't know if this is a hard requirement for retail generally in Europe, or just the easiest way for them to deal with VAT accounting on their end when only a small portion of their business is retail.
There are also different rates from different countries, so applying a 25% retaliatory tariff is questionable. Even in the UK, they have different rates (5% - 20%): https://www.vatcalculators.co.uk/
It's important to understand that (in simple terms) businesses do not actually pay VAT. VAT is a tax that ultimately burdens consumers, not companies. When a business purchases a product that includes VAT, it initially pays the VAT amount. However, when the same business later issues invoices for its own products or services (also including VAT), it is required to remit the VAT to the tax authorities minus the VAT it has already paid on its own purchases.
In practice, this means that if you sell something with VAT to a company, the VAT component is irrelevant to that company. This is, of course, a simplified explanation, but fundamentally, that's how the system works.
For a bunch of supposedly smart people there is some really profound misunderstanding of European VAT on this thread. I was going to put it right but I can't be bothered with the pedantic armchair experts. I'm in Finance at a large multinational, and I'm responsible for over $100m of trade in goods across the world. I'm going to state the facts and armchair pedants be damned. My business pays no VAT. I reclaim all import VAT and any other purchase VAT. I can't reclaim import duties (tariffs). Therefore VAT is not a tariff. The end.
Is Stephen Miller really that stupid, or does he have an agenda to gut American business? One really has to wonder if he's actually a spy from an adversarial nation.
Everything with these people makes sense when you understand that they want to break down the United States into their own corrupt little fiefdoms. They are anti-Union, not just with workforces, but with nations, because united people are harder to exploit.
This is why the way to fight them is to get involved in your local communities. Get off social media and get involved locally. Talk to people, help people.
The intended audience are the American people, to make it look like "America is not going to take that shit that ___ have been given us anymore!" It just has to have the illusion of action, since most voters don't read enough, or are educated enough, to evaluate and understand the substance.
By weakening its ties with Europe and other allies, the US is undoubtedly taking actions that benefit both Russia and China. That's not to say the president or his team are in cahoots with one or both of those countries, but these are the kinds of actions the US would be taking if that level of conspiracy were to be true.
There are a couple goals here. They would like to tank US economy so oligarchs can buy it for pennies on the dollar. Oligarchs like Elon and Thiel want to own their own cities called Network States. You can find more details about that here https://www.thenerdreich.com/
Trump is owned by Russia and China so turning America away from Europe weakens them. Like Zelenskyy says, Russia is likely going to attack NATO within the next couple years so breaking them away from America takes away a very powerful ally. Europe likes to twiddle their thumbs so he is betting that they won't get their shit together and odds are he is right. The EU moves slowly and is very nonsensical.
The real play that not even Trump sees coming is putting JD Vance behind the desk. Elon and the rest of the billionaire class are just using Trump to set the table for Vance. Once that happens we are all truly fucked.
I don’t know, if Elon and Thiel think they’re just using Trump for their own ends and they’ll discard him once they’re done, they’ll join a long line of people who I’ve heard the same theory about, all of whom ultimately failed.
To be honest, I don’t think there’s a single person in this entire pyramid of horrible who is a threat like Trump. It’s not because Trump is smarter or more evil than the rest of them, it’s because he’s absolutely shameless in a way you can only be if your brain is legitimately miswired. And as a result, he has managed to capture the loyalty of a third of America who will rabidly support him no matter what. Those people aren’t going to do that for Vance, or Musk, or DeSantis. Trump is unique in that regard.
VAT is paid by consumers. If I buy locally I am charged the VAT, as we are sensible place it is included in to the price. So I don't have to do mental math every time what is 25.5% on top of 13.37€...
But if I import something myself I need to pay the VAT (and possible tariffs) on the price I paid and shipping. And the handling that posti here charges... So in the end I am paying it.
Ofc, making your customs to handle each package separately each time is sub-optimal so with large enough entities there is more automation and rules. But still I am one that pays for it as consumer.
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The VAT is important in Europe, because if a product is manufactured in many countries, each of those countries gets a share of the tax revenue.
Say the VAT rate is 20%. Now if you buy something for $100, install it and charge $100 to your customer, you get back $20 from the tax authority and pay them $20, so if billing cycles align no money actually flows to or from the tax authority. But if you add value, say by buying $100 in parts, assemble them and sell the assembly for $150, you get back $20 for parts purchased but collect $30 for the sale, creating a net flow of $10 to the tax authority.
If everything happens under the same tax authority this nuance doesn't matter, in total there's always a $30 tax on a $150 part, no matter how complex the supply chain. But if more countries are involved the difference matters: if a company in Poland makes parts worth $100 and a company in Germany assembles them and sells them in the German market for $150, that's $20 in taxes for Poland and $10 for Germany. With a sales tax that's only collected when selling to a consumer it would have been $30 for Germany and $0 for Poland.
compare to American sales taxes, where sellers have no economic incentive to collect sales taxes beyond the probability of being caught and fined.
If i offer a service for 100 €. I have play VAT for i, typically i add these to the bill, but for the sake of simple numbers i dont.
As an example, i have following costs for offering the service: - Materials: 20€ - i can deduct these from the VAT. - Salaries: 60€ - i can NOT deduct these from the VAT. - Profit: 20€ - i can NOT deduct these from the VAT.
So earning my company 100€ will have me pay (in switzerland for example 7%) approximately 6€ VAT, the 1€ i did not have to pay, must be paid by the producer of the materials. Of course you can argue that the customer pays the 6€ and my company only pays the 1€, but it's never the less always a split bill.
Edit: Congratulations to the people who are down voting very basic mathematics.
Example I manufacture and sell teak wood tables in Portugal. I buy the wood from Asia, which does not have a VAT and is outside the EU. When I import said wood, I get assessed a value to pay VAT on. This is a tariff. I buy the stain and finish from Germany, which is inside the EU and has a VAT, through a complex paperwork system, I also pay VAT when the finish gets imported to me, but eventually I can claim that VAT paid back and it “nets out”. So I get this back. How do I get it back? I can subtract VAT paid from the VAT collected when I sell the goods.
Yes, VAT is a tariff, by a different name.
You add VAT to things you sell (e.g. car repair services), you pay VAT on things you buy (e.g. car parts). If you collected more VAT on sales than you paid on purchases, you owe that to the tax department.
It's a bit of book-keeping but doesn't affect your profits directly.
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Deleted Comment
But also there was something about taxing consumption that was bad somehow.. is it regressive? I don’t remember. Feels “flat”, but maybe not?
And yes, it's regressive relative to income. Poor people spend all their money on essentials, paying the vat on all their income. Rich people can save most of their money (e.g in stocks), and end up paying a much smaller percentage of their income in VAT.
But many countries have different VAT brackets for different goods, e.g. in Italy at different times (I'm not sure of the current brackets) "staple" goods like bread or milk had 4% VAT, health and education had 5%, fish or meat had 10%, generic services have 22% and at some point "luxury" goods had 30%+ vat.
This offsets the regressiveness somewhat.
In school (economics, law) I had learned all about how great the VAT system is. But about 10 years ago I wanted to buy a simple ~$100 rack shelf to fit a PC Engines APU from an Italian manufacturer. I had to create an Italian tax ID, which was annoying. I recently had to use it again just to buy some tins of anchovies from Italy.[1] In both cases I received more paperwork regarding the VAT than I did the import paperwork. It seems slight but it's actually quite a lot of friction compared to just giving X dollars and receiving your product. Dealing with tax and import crap is exactly why import/export companies exist, creating needless intermediaries that siphon value.
In that light, the "inefficient" sales tax premiums we pay in the US can be interpreted as the cost of enjoying a more decentralized taxation system that makes compliance more convenient and transactions run smoother. There's less accounting and--more importantly (because US accounting can be complex, too)--less coordination required. It's the economics version of worse is better.
[1] And just to be clear, in both cases I was purchasing through a clearly retail-oriented store website. IOW, even as an effectively retail consumer you had to provide a tax ID--the equivalent of an employer ID or social security number in the US. I don't know if this is a hard requirement for retail generally in Europe, or just the easiest way for them to deal with VAT accounting on their end when only a small portion of their business is retail.
In practice, this means that if you sell something with VAT to a company, the VAT component is irrelevant to that company. This is, of course, a simplified explanation, but fundamentally, that's how the system works.
In the event that VAT has been paid, the reimbursement goes via the tax authorities.
https://en.wikipedia.org/wiki/Foundations_of_Geopolitics
Now that our government controls the domestic price of fuel in the US, it's too bad Lula doesn't seem to be in a trolish mood...
Dead Comment
Trump is owned by Russia and China so turning America away from Europe weakens them. Like Zelenskyy says, Russia is likely going to attack NATO within the next couple years so breaking them away from America takes away a very powerful ally. Europe likes to twiddle their thumbs so he is betting that they won't get their shit together and odds are he is right. The EU moves slowly and is very nonsensical.
The real play that not even Trump sees coming is putting JD Vance behind the desk. Elon and the rest of the billionaire class are just using Trump to set the table for Vance. Once that happens we are all truly fucked.
To be honest, I don’t think there’s a single person in this entire pyramid of horrible who is a threat like Trump. It’s not because Trump is smarter or more evil than the rest of them, it’s because he’s absolutely shameless in a way you can only be if your brain is legitimately miswired. And as a result, he has managed to capture the loyalty of a third of America who will rabidly support him no matter what. Those people aren’t going to do that for Vance, or Musk, or DeSantis. Trump is unique in that regard.
But if I import something myself I need to pay the VAT (and possible tariffs) on the price I paid and shipping. And the handling that posti here charges... So in the end I am paying it.
Ofc, making your customs to handle each package separately each time is sub-optimal so with large enough entities there is more automation and rules. But still I am one that pays for it as consumer.